It is no secret that interest rates on saving accounts, CDs, bonds and stock dividends are at all time lows. A simple trip to any online interest rate quoting site will tell you exactly this.
So, how can I say you can get 30%, or more, retirement income if rates are in the 1 to 2% range? Do I have a magic wand?
Actually I do have a magic wand. It is called an annuity. Not just any type of annuity mind you but a very special one that gives you the opportunity to employ one of two strategies that could actually result in your deposit doubling over 10 years.
Let me quickly interject a disclaimer. Annuities are not for everyone. Always understand your particular situation at the time you are considering opening an annuity. I also must disclose that I am a licensed life insurance agent and I hate, and I mean absolutely hate variable annuities.
This article will not mention variable annuities again. In fact, I will tell you NOT to even bother looking at them. Why? Because their fee structure makes them extremely expensive. If you are investing money and up to 10 to 12% of your invested dollar is eaten up in fees on an annual basis, you might as well have stood on a street corner and given your dollar bills to all the people passing by.
Forgive the rant but the annuity I am talking about does not have those damnable fees. Yes, it has fees but NO upfront fees and no commissions. That is important because that means ALL of your money goes to work for YOU the moment it is deposited.
An annuity is not considered an investment in the truest sense of the word as it is not listed on a stock exchange or sold across the counter. In other words, it is not a traded security.
It is a contract with an insurance company under which you give them money, either lump sum or over a period of years, and they in turn, at a time in the future, give you money.
That's all an annuity is. Take your home mortgage. The lender gave you money to buy your home. You in turn make monthly payments over a period of 15 or 30 years. The lender has an annuity. When you buy one from an insurance company you imitate a mortgage lender.
The annuity I like employs two strategies as I mentioned above. They are called the Today Strategy and the Tomorrow Strategy. For the annuity owner who wishes to begin receiving a lifetime monthly income check they cannot outlive within the first three years of buying the annuity the Today Strategy is their answer.
This strategy gives them the possibility of receiving a bonus of up to 45%. It looks like this.
Suppose you wanted to start receiving a monthly check in the first year of your deposit. The insurance company would accept your deposit and give you a bonus of 30% applied against that deposit.
Mathematically a $100,000 deposit would become a $130,000 deposit because the 30% bonus on a $100,000 deposit is $30,000. That means your monthly check is computed on a deposit of $130,000 instead of $100,000. This automatically increases the size of your monthly check.
By the way, you can opt to have the company send you an annual check. If you do, it is computed in the same manner.
But let's suppose you want to wait until year two. If you do, your $100,000 deposit will receive a bonus equal to 37.5%. Your $100,000 is now $137,500. When you receive your check it will be that much larger.
If you wait until year three, your bonus is 45% making your $100,000 deposit equal to $145,000. Again your check will be that much higher.
Obviously the bigger numbers mean a larger check. However, another factor that makes the checks larger is you have aged one or two years by waiting till year 2 or year 3. This means the mortality factor has also increased the size of your check because the insurance company knows it will be paying you for a shorter period.
Uh oh you might be saying. You mean I might lose my money. No, you won't, for two reasons. The first reason is the company has guaranteed you a check for life. That means you can live to be 150 years old and the company will still be paying you a check.
The second reason is if you have a spouse and elected the spousal rider your spouse will continue to receive a check for life should you pre-decease your spouse. This annuity was built to protect you the annuity owner.
I mentioned it has two strategies. The second strategy is called the Tomorrow Strategy. This strategy is structured for the person who can wait 10 or more years before receiving a check. Should you be that person you are handsomely rewarded with a 14% per year simple interest bonus. This bonus is called a roll up in the parlance of the contract.
Using the same above $100,000 as our example, your deposit would receive $14,000 per year for 10 years. At the end of 10 years your benefit base, which originally was your $100,000 deposit, is now $240,000. That is more than double your original deposit, right?
Imagine if you put $1,000,000 on deposit. It would be worth $2,400,000 in 10 years. Where else can you be guaranteed to double your initial deposit? I don't know of any bank that will make this type of guarantee. Do you?
Do you know of any stock brokerage firm or mutual fund that will guarantee this type of return? I don't.
There are two charges associated with this annuity. The first is a rider cost. You are NOT charged this fee until you begin receiving a check. The fee is subtracted from the amount of the check before you receive it and is disclosed to you prior to the company starting your monthly check.
I will use my annuity as an example. When I notified the company I wanted to start taking a monthly check, one of their actuaries did the calculations as to what I would receive monthly and the company told me the number. I could refuse or accept it.
I accepted it as I am 70 years old and wanted to take my money. I also accepted it because if I die, my wife will continue to receive that same amount of money. This means her income stream continues uninterrupted. This is a very good feeling.
My annuity check is part return of principal and part interest. I will have to declare that portion that is interest on my income tax. Whether I pay or do not pay taxes on that interest is determined by my deductions, credits and other allowable expenses. So, I may escape taxation completely. Each person's situation is different. The insurance company will send you a 1099 detailing the amount of interest you received. Generally, the older you are the portion that is interest is only a small part of your check.
The second charge is something no one can control. It is called a premium tax (see chart below). It is a tax levied by 7 state governments. They do not tax you when you make the premium deposit. Rather, they wait until you withdraw the money. If you live in one of these states, this tax is applicable. Otherwise you do not face this charge.
Just like the rider fee, the insurance company computes these taxes and makes them for you before you receive your check.
Granted both are a pain in the behind and are costs but name one investment that does not have a fee, cost or commission. Even your local bank CD has a cost. It is called a very poor interest rate and a penalty fee should you withdraw your money before it matures. And, this is very important, it does NOT guarantee you an income for life.
I will gladly pay the rider fee and premium tax on an annuity that is guaranteed to send me a check for life. Remember, no other investment can do that. Again, ask your bank to guarantee you a check for life.
If they do, they will tell you to purchase an annuity from one of their representatives. Tahdah! more proof of the income power of an annuity.
By the way, if you elected the Today Strategy and waited until year four or beyond to take your money, you would have received a roll up of 3% in the years after year 3. The same 3% holds true for the Tomorrow Strategy. If you waited until year 11 or beyond to take your money, you would receive a roll up of 3% in each of the years after year 10.
This particular magic wand annuity (my term) has you covered regardless of what you decide. You can take your money now and get 30% more retirement income or wait 10 years and more than double your retirement dollars.
The choice is yours. Pay yourself now or pay yourself later. Both have their own special rewards.
For more information, email me at: tom at senior 2 senior dot org. Sorry about writing it out like that but I don't want a trillion spam emails because someone scraped my email address. Simply convert the at and dot to their appropriate symbols and you have a working email address.